New Zealand Emissions Trading Scheme Review:Submission

Thank you for the opportunity to submit our views in respect of the New Zealand Emissions Trading Scheme Review 2015/16. Thank you also for providing a briefing on the review.

Coastal shipping is a vital part of New Zealand’s transport infrastructure. It also plays a role in civil defence. It is important for New Zealand economic, environmental and social welfare that the coastal network operates efficiently and effectively. Central and local government decisions can optimise the way that the coastal network performs. These decisions can also drive unnecessary costs into shipping operations.

The Federation is committed to working with decision-makers to ensure that the best policy settings are in place for the benefit of all New Zealanders. We are happy to work proactively to bring sector knowledge to support the policy-making process.

The New Zealand Shipping Federation is the key representative body for New Zealand’s coastal shippers. Members of the Federation are:

The interests of ship operators are closely aligned with the stated intention of the government to reduce the carbon footprint of New Zealand. It is in the best interests of any ship operator to ensure that their vessels operate as efficiently as possible, as the largest operational cost, close to crewing costs, is the price of fuel bunkers. Therefore, when assessing vessels for lease, purchase or building, the fuel consumption in tonnes per hour is of critical importance. By way of example, one of the members of the Federation has commissioned 2 new ships to be built, each of which will have significant fuel (and therefore carbon) efficiencies built into the design. The incorporation of new technology plus new hull design elements will result in a reduction of fuel consumption by at least 25%.

Small variations in fuel usage (and therefore carbon consumption) contribute significantly to the cost of a vessel over the years of ownership and operation. Such improvements include (but are not limited to):

• the maintenance of a clean vessels hull to reduce friction and hence drag through the water,

• operation at economical speeds to provide the most cost and fuel efficient service speed of the vessel, and

• routing of a vessel to reduce the distance travelled.

The introduction of the emissions trading scheme coincided, more or less, with a drop in the price of fuel. To some extent the effect of one is masked by the other. That said, the cost of the ETSunits is a significant burden on each of the ship operators represented by the Federation.

For example a coastal vessel that trades and consumes 20 m3 of fuel per day, or 20,000 litres at a / litre for simplicity , will cost approximately $7,000,000 a year in operational fuel costs.

The recent increase in the ETS charge to 1.42 c/pl adds an additional operational charge of 00,000, per year on that vessels operational costs.

For a fleet operation of two to three vessels, the additional costs are obvious, which in turn have to be charged to customers or, make the operation less competitive to those operators that do not have the higher operational costs such as international operators.

The emissions trading scheme in New Zealand has a number of design flaws. The Federation believes that this review is an opportunity for the scheme to be redesigned to address these flaws.

We understand that the emissions trading scheme is intended as a way of signalling and incentivising the government’s policy of transport de-carbonisation. Put simply, the government wants to incentivise lower carbon usage in the transport sector. The scheme is the cornerstone of a suite of government policies to achieve this.

For that reason, we believe that this review should focus on whether the scheme is imposing costs where there is no alternative or where the alternative mode of transport has a larger carbon footprint.

In the first case, where there is no alternative, the cost of the carbon credits does not achieve the stated policy as no change will occur in the transport choices. Indeed, in a competitive market, the effect is to push up the cost of credits to all buyers. We accept that this could benefit the vendors of credits who might, therefore, increase their absorption activities but it seems very one-sided. In the second case, increasing the cost of transport services in an efficient mode might lead to a shift to a less efficient mode, leading in turn to greater carbon production within the total transportation picture.

The Federation believes that transportation by sea is accepted as more carbon efficient that transport by other modes. Therefore, the government policy objectives can be best met by ensuring that transport by sea is not penalised by the operation of the emissions trading scheme. Government policy objectives also imply that different ship operators should be treated equally in situations where there is no significant difference in the carbon-efficiency as between ships

The Federation understands that the international norm is that bunker fuel is outside various carbon disincentive schemes that are in place around the world. We believe that this reflects the wide acceptance of the relative efficiency, especially carbon efficiency, of ship operations. In New Zealand the bunkering of ships on international voyages is exempt from the need to purchase carbon units. This gives those ships a legislated advantage over New Zealand-based ships. This is significant as the international and New Zealand-based ships compete directly for local cargo, that is, between New Zealand ports. The Federation believes that the same rules should apply to all operators in New Zealand waters.

Two members of the Federation, Interislander and Strait Shipping, operate a virtual bridge between the North Island and South Island. This is a vital part of our transport infrastructure. The only alternative to the virtual bridge is air movement (or swimming). The requirement for the operators of these ship to purchase ETS units does not fit within the reasons for implementing the emissions trading scheme. Increasing the cost of transport between the islands does not incentivise the use of a more efficient transport mode. It simply drives cost into the New Zealand economy.

One member of the Federation moves fuel by ship. This is more environmentally friendly and carbon efficient than the alternative of movement by land (road or rail) or pipeline. The current requirements to purchase carbon credits for the fuel use in the transportation of this cargo implies that the government would prefer that the less carbon-efficient method is used.

We also note the costs of purchasing ETS credits is passed onto ship operators by the fuel companies. This has created a problem as information about policy changes that may have been advised to the fuel supplier has not been passed onto the ship operators. The change from international units to New Zealand units resulted in a shock bill to each operator in January 2015. It is impossible to plan in such an environment and we seek assurance that ship operators will get early advice of such policy changes.

In summary:

• Maritime transport is accepted as a carbon-efficient mode of transport relative to other modes of transport.

• Ship operators have a natural incentive to reduce their carbon footprint as fuel is their largest cost. They are already investing in this.

• Either all SOLAS vessels should be exempt from the emissions trading scheme or none should be exempt.

• SOLAS vessels are relatively carbon efficient and should therefore be exempt from the emission trading scheme as this is consistent with the intention of the scheme to incentivise use of the most efficient mode.